2023 (5) TMI 541 - AT - Income Tax

Disallowance of interest u/s 36(1) (iii) - advancing interest free loans to certain parties - grievance of the revenue is that the interest income received on the loans advanced is less than the interest paid on its borrowing, thereby leading to disallowance of excess interest paid in the sum - DR argued that assessee, being a non-finance company (NBFC), the main source of income itself is only interest income, hence the assessee could not take shelter of availability of interest free funds theory as it is expected to earn interest income on every lending and the same should be more than the interest paid on its borrowings - HELD THAT - This action of the revenue is not justified in the eyes of law. Once the borrowing is utilised for the purpose of business by the assessee, the interest paid on such borrowing would be squarely eligible for deduction u/s. 36(1)(iii) of the Act, irrespective of the fact whether assessee had received interest at lower rate than its borrowing rate or received nil interest. This aspect is very well settled by the decision of Hon ble Supreme Court in the case of Reliance Industries Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and S.A Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT In any case, the issue in dispute squarely covered by the decision of this Tribunal in assessee s own case for the assessment year 2014-15 2018 (8) TMI 2116 - ITAT DELHI - Decided in favour of assessee.

Summary

Issues:
The only issue to be decided in this appeal is whether the disallowance of interest in the sum of Rs. 8,32,459/- was justified.

Details of the Judgment:

Issue 1: Disallowance of Interest
The Assessing Officer (AO) observed that the assessee company, engaged in lending, had debited a sum of Rs. 1,18,79,501/- towards interest paid on unsecured loans, while also receiving interest income of Rs. 1,10,56,045/- on loans and advances given. The AO concluded that the assessee had diverted borrowed funds for advancing interest-free loans to certain parties, leading to the disallowance of excess interest paid. This action was upheld by the ld. CIT(A).

Issue 2: Arguments by the Assessee
The ld. AR argued that during the relevant year, the assessee had sufficient interest-free funds, which were used for interest-free loans. Referring to a previous Tribunal decision in the assessee's case, the AR contended that the disallowance under section 36(1)(iii) of the Act was not warranted.

Issue 3: Revenue's Counter-Argument
The Ld. DR contended that as a non-banking finance company (NBFC), the main income source being interest, the assessee should have earned more interest income than paid on borrowings, irrespective of the availability of interest-free funds.

Issue 4: Tribunal's Decision
The Tribunal noted that the assessee's borrowing was utilized for lending purposes, making the interest paid eligible for deduction under section 36(1)(iii) of the Act. Citing relevant legal precedents, including a decision of the Hon'ble Supreme Court, the Tribunal held that the disallowance of excess interest paid was not justified. Relying on the principles laid down in a previous decision in the assessee's case, the Tribunal directed the AO to delete the disallowance of interest in the sum of Rs. 8,23,459/-.

Conclusion
The Tribunal allowed the appeal of the assessee, setting aside the disallowance of interest. The order was pronounced in the open court on 18/04/2023.